Malaysia Airlines crash triggers risk-off reaction

WilliamL. Watts

Reuters

An Emergencies Ministry member works at the site of a Malaysia Airlines Boeing 777 plane crash in eastern Ukraine.

NEW YORK (MarketWatch) — Whether the crash of a Malaysia Airlines jet carrying 295 passengers in eastern Ukraine was a conflict-related travesty as well as a human tragedy will determine its long-term impact on financial markets.

Investors immediately sold stocks in the aftermath of the crash, sending U.S. indexes sharply ower and adding to a drop in European equities. U.S. Treasurys and gold jumped as traders sought out assets viewed as havens in times of turmoil.

Stocks extended their initial decline and the VIX added to its jump after Israeli Prime Minister Benjamin Netanyahu ordered a ground offensive in Gaza. The S&P 500 saw its biggest one-day drop since April 10, while the Dow Jones Industrial Average posted its biggest one-day decline since May 15.

Ukrainian officials said the aircraft may have been shot down, possibly by a Russian-made antiaircraft system. If that proves to be the case, it would mark another dark turn in one of the world’s most volatile geopolitical hot spots.

Recently dormant concerns over Ukraine were already edging back into traders’ field of vision after Russian President Vladimir Putin had earlier hinted at retaliation against U.S. firms followint Washington’s announcement of fresh sanctions against Moscow over its failure to end fighting in Ukraine.

It also comes as investors ponder whether U.S. stocks are vulnerable to at least a near-term pullback with the S&P 500 and Dow Jones Industrial Average setting just off record highs.

The worst-case scenario from a market perspective would be one in which it was found Russian officials ordered the plane shot down while the most benign scenario would be one in which the crash was the result of mechanical failure, pilot error or some other cause unrelated to the long-running conflict on the ground, said John Canally, investment strategist at LPL Financial in Boston.

“Right now what the market is saying that it’s probably something in between [those scenarios] but we’re going to be cautious and see exactly what it is,” he said in an interview. At the same time, investors remain aware of a bullish backdrop as second-quarter earnings season moves into full swing, Canally said.

Strategists also note that past geopolitical flash points have tended to have little lasting impact on financial markets beyond an initial knee-jerk reaction. Oil, for example, spiked earlier this year as the Ukraine crisis initially flared and Russia annexed the Ukrainian region of Crimea.

Attacks by Sunni insurgents in northern Iraq briefly unsettled markets and sent oil to nine-month highs in June, but soon lost their impact as investors felt reassured that Iraq’s oil exports remained insulated from the violence.

“While investors’ worst case scenario is that the Malaysian airplane was downed by troops, the escalation of Russo-Ukrainian tension is not likely to drag markets down beyond today,” said Andrew Wilkinson, chief market analyst at Interactive Brokers. “Investors have proven touchy when geopolitical tension increases, but sitting at bull market highs equally shows how quickly they are to digest bad news and move along.”

Here’s where markets stand:

The S&P 500
SPX, -0.23%
fell 23.45 points, or 1.2%, to close at 1,958.12. The Dow industrials
DJIA, -0.32%
ended 161.39 points lower, a fall of 0.9%, at 16,976.81.

The yield on the 10-year Treasury note
US:10_YEAR
which moves in the opposite direction of prices, fell back below 2.5% and remains down more than 7 basis points at 2.456%.

Gold futures for August delivery
US:GCQ4gained $17.10, or 1.3%, to settle at $1,316.90, the biggest one-day jump for a front-month contract since a 3.3% rise on June 19.

August Nymex crude oil futures
US:CLQ4
rose 1.9% to $103.14 a barrel, while September Brent crude
UK:LCOU4
the global benchmark, added 60 cents, or 0.5%, to $107.77 a barrel.

The Market Vectors Russia ETF
RSX, -0.82%
and the iShares MSCI Russia Capped ETF
ERUS, -0.83%
tumbled Thursday. They slid 5.8% and 5.5% intraday, respectively, putting them on pace for their biggest single-day percentage drops since March 3, when a military standoff in Crimea intensified.

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